Apple iPhone Pricing Resilient, For Now

by Trefis Team
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Apple (NASDAQ:AAPL) recently announced results for the second quarter of 2010. Headline news: Despite increasing competition in the smartphone sector, iPhone pricing remained strong at an average of $595 for the quarter. This compares well with the $593 average price for the whole of 2009.

We recently increased our Apple stock price forecast from $296 to $337 due to the iPhone pricing news and several other factors that we will cover in a future article. This forecast incorporates our assumption that competitive pressures will force Apple to lower iPhone prices over time. Our analysis follows below.

Potential upside to Apple’s stock if pricing remains resilient in the long term

Apple competes with Research in Motion (NASDAQ:RIMM), Motorola (NYSE:MOT) and Nokia (NYSE:NOK) in the mobile phone market. Although Apple has managed to keep average iPhone pricing between  $550 and $650 for the past six quarters, we believe that Apple can’t sustain these high prices for long. We currently estimate that iPhone pricing will decline from $593 in 2009 to $413 by the end of the Trefis forecast period.

iPhone constitutes nearly half of the $337 Trefis price estimate for Apple’s stock. You can drag the line in the chart below to create your own estimate for the impact of changing iPhone pricing on Apple’s share price.

In the unlikely event that the current average price holds over the long term, it would create a 20% upside to our  $337 estimate for Apple’s stock. Below we explain why we think Apple will be forced to reduce iPhone pricing.

1.  Competitors are cutting prices and improving phones

RIM, Motorola and Nokia smartphones have much lower price points compared to the iPhone. Unlike Apple, RIM and Nokia have steadily cut their smartphone prices over the past few quarters, while introducing new features that make their phones increasingly competitive with the iPhone.

The table below compares average prices of Apple, Nokia, Motorola and RIM smartphones since the first quarter of 2009.

Price Apple RIM Motorola Nokia
Q1  2009 $580 $369 EUR 190
Q2 2009 $558 $356 EUR 182
Q3 2009 $608 $344 EUR 190
Q4 2009 $638 $319 EUR 186
Q1 2010 $600 $311 $357 EUR 155
Q2 2010 $595 $299 Result Awaited EUR 143

2.   AT&T negotiates for lower subsidy

AT&T (NYSE:T) pays Apple a subsidy of around $400 per iPhone. In an earlier article, we noted that the wireless giant will likely press Apple to reduce this subsidy after AT&T’s exclusive license to sell the iPhone expires next year. This would mitigate AT&T’s risk of losing subscribers to rival  Verizon (NYSE:VZ) if Apple decides to sell iPhones through Verizon’s  network from 2011 onward.

A lower AT&T subsidy would put pressure on Apple to reduce iPhone pricing in order to make the device more competitive with other smartphones.

You can see the complete $337 Trefis Price estimate for Apple’s stock here.

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